Mumbai: Foreign exchange dealers are staying away from betting on the rupee against the dollar although a weakening bias continues in the medium to long term.
After Reserve Bank of India (RBI) governor D. Subbarao on Wednesday hinted at the possibility of more rate cuts, the rupee broke past the psychologically significant mark of 50 to a dollar. A lower interest rate makes the underlying investment opportunities in a country unattractive. The rupee subsequently recovered to close at 49.62 per dollar on Thursday from its Wednesday’s level of 49.92/93.
The main reason for the rupee’s sudden depreciation, according to dealers, can be attributed to “stop loss” orders by importers—who suffer when the rupee is weak because they need to buy foreign exchange—and activities in the overseas futures market.
For about a month, the rupee moved in the band of 48.60-48.90 to a dollar and, according to foreign exchange dealers, importers were largely waiting for the rupee to strengthen. But once the rupee crossed the 49.20 a dollar level early this week, they started buying dollars from the market and exporters entered the market at the 49.50 level to sell dollars.
In the overseas non-deliverable futures market, where assets are bought and sold at current rate for future delivery, the one-month rupee—or the rupee’s estimated price a month later—was trading at 50.25 to a dollar on Wednesday. However, the forward price dropped substantially on Thursday to 49.87 a dollar as rupee strengthened in the local market.
“Volatility in the foreign exchange market has increased substantially. Given this, I expect rupee to move in the broad range of 49.20-50.30 a dollar for some time, although pressure on rupee will continue given the fiscal deficit,” said Mohan Shenoy, head of treasury at Kotak Mahindra Bank Ltd.
Standard Chartered Bank’s head of foreign exchange trading Agam Gupta also said the rupee is going to be in the range of 49.40-50.40 to a dollar for a week.
“It’s a long liquidation that is happening,” said Gupta. “People who were long on the dollar are squaring off their position and booking profit.”
India’s high fiscal deficit, estimated at 6% of gross domestic product for 2008-09— against an initial target of 2.5%—is also pushing the currency market to believe that the rupee will touch its December low of 50.65. The high fiscal deficit has also brought with it the fear of a lowering of India’s sovereign rating, which is affecting overseas investor sentiment. “If rupee crosses 50.20 (to a dollar), it will go to 50.50 and beyond,” said a dealer with a large public sector bank, who did not want to be named because of his bank’s media policies. “However, there is a real possibility that rupee can strengthen to 49.20 and down as overseas forwards have cooled down, exporters have sold a large portion of their dollars in the market and RBI is not going to supply dollars this time.”